26103858 Cost Management

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COST MANAGEMENT

PRESENTED BY:

HARSH JAIN

PGDM SEM-1

SEC -µµC´ ROLL-5130



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Cost Management Cost Management includes:

Cost Estimation

Cost Budgeting

Cost Control

Estimation & Budgeting ± Main Tools & Techniques

Estimation Techniques Reserve Analysis ( Risk, Unknown, Cost of Quality)

Cost Baseline

Funding Requirements & Cash Flow

Cost Control.

Performance Measurement Analysis: Planned value, ActualCost, Cost Variance, Cost Performance Index, Estimate toComplete

Approved Change Requests



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Estimating Schedule Activity

Estimation Cost of the Resources Needed to complete the

activity

Includes variations to the cost estimate (Risk, Etc.)

Take into consideration Alternative Costing for the overall

project time period

Cost of extended design effort VS. additional maintenance costs

Cost estimates include ALL resources that will be charged to the

project including Inflation Forecast, Salary Increase,

Contingency cost.

ROM (Rough Order of Magnitude, E.G: ± 50/+100%) is allowed

in the first stages. Refinement is required at later stages ( E.G:

-10/+15%).



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Activity Estimating ± Inputs & Tools

Inputs External Factors: Marketplace Condition, External Cost

Information Databases

Organization Assets: Historical Information, EstimatingPolicies and Templates, Team Knowledge

Project Factors: Scope, WBS, Management Plan, SchedulePlan, Staffing Plan, Risk

Tools

Resource Cost Rates Parametric Estimates ( Function Points Etc.)

Vendor Bid Analysis

Project Management Software

Analogous estimate



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Activity Estimating ± Inputs & Tools

(Cont.) Reserve Analysis (Contingency Allowance)

Will Be Used at the Discretion of the Project Manager

Budgeting Project Unknowns

Risks Will Be budgeted according to their severity level andprobabilities

The budget will cover mitigation activities and workaroundsand will be implemented upon the project manager decision.

Cost of Quality (COQ) Costs added to the project in order to ensure conformance

with quality standards

Cost of Non Quality ± Failure Cost/Rework. Costs that willadded as a result of bugs and non-quality project activities



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Activity Estimating - Output

Activity Cost Estimating ± Most likely estimates of allthe activity resources

Estimate Details Basis for the estimate (how it was developed)

Assumptions made

Constraints

Possible range of the estimate ( 100000$ -10%/+15%)

Requested Changes ( If the estimate analysisrecommends a change)

CA ± Control Account (the corporate accountingnumber that will incur the cost of the activity)

Cost Management Plan (Update)



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Cost Baseline Aggregating the estimated costs of the individual

scheduled activities to establish a total COSTBASELINE for measuring and budgeting the project

Inputs: WBS, Activity Cost Estimate, ProjectSchedule, Resource Calendar, Contracts, Cost

Management Plan Tools & Techniques: Cost Aggregation, Reserve

Analysis, Parametric Estimating ( adjustment to theaggregate cost), Funding Limit Reconciliation (can

impact the schedule and overall cost)

Output: Cost Baseline, Expected Cash Flow, FundingRequirements (including Management Reserve),Requested Changes, Updated Cost ManagementPlan



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Cost control Assuring the Potential Cost Overrun do not exceed

the authorized funding PERIODICALLY and inTOTAL

Monitoring cost PERFORMANCE to detect andunderstand Variances from the Baseline

Detect Changes as they occur

Prevent unapproved changes

Ensuring Requested Changes are Agreed Upon

Report Changes to Stakeholders

Acting to bring expected overruns within acceptablelimits

Influencing factors that creates changes to the costbaseline



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Performance Measurements

Planned Value (PV) or Budget Cost of WorkSchedule (BCWS) ± baseline budget up to a givenpoint in time.

Earned Value of an Activity 0/100% technique ( The Recommended One): 0 if the

activity is not fully completed. Full Actual Cost if the activitywas completed.

50/50% technique: 50% of the planned cost if the activitystarted, 100% of the actual cost if it was completed

Milestone Technique: Actual Cost at the milestone date.

Earned Value (EV) or Budget Cost of WorkPerformed (BCWP) ± the sum of the baseline costs of the work performed up to a given point in time

Actual Cost (AC) or Actual Cost of Work Performed(ACWP) ± up to a given point in time



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Performance Indicators

Cost Variance ± The difference between actual andbudget cost spent up to a given point in time: EV ±

AC.

Schedule Variance ± The difference of the baseline

budget actually spend up to a given point of time andthe baseline budget that was originally planned up tothe same date: EV ± PV

CPI (Cost Performance\Overrun Indicator): EV/ ACEarned Value/ Actual Cost. CPI <1 indicates budget

overrun SPI (Schedule Performance\Overrun Indicator):

EV/PV Earned Value/Planned Value SPI<1 indicatesschedule overrun



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Example



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Forecasting

Making Predictions or Estimates of the Projectfuture Schedule or Cost based on the projectavailable information at the time of theForecasting.

Forecasting is USED TOGETHER withManual Forecasting of the remaining work.(which is considered to be more accurate)

Definitions:

BAC (Budget At Completion): Cost baseline at theend of the project

ETC (Estimate To Complete)

EAC (Estimate At Completion)

ADE ± Activity Duration Estimate





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Forecasting Techniques - Time

Recalculate Time of Future Activities Based on Typical Variance (History performance

of activity duration estimate is a good predictionfor the future performance) ADE(NEW) = ADE/SPI

Based On Atypical Variance ( History deviation of

planned performance is irrelevant for this activity) ADE(NEW)=ADE

Estimate Time To Completion will becalculated according to the project work

schedule and the critical path. If the variance is typical across the project we

can use a rough estimate : ADE = Plannedtime to completion/SPI



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Example



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Cost Control Workflow

Input: Cost Baseline, Funding Requirements,Performance Information and Reports, Approved

Change Requests, Project Management Plan

Tools & Techniques: Cost Change Control System,

Performance Measurement Analysis, Forecasting,Project Performance Review/Meeting, Variance

Management

Output: Cost Estimate Update, Cost Baseline

Update, Performance Measurements, Forecasted

Completion, Requested Changes, RecommendedCorrective Actions, Organization Process Assets

(lessons learned), Project Management Plan (update)



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Approved Change Requests

Changes in the Scope of the System Requirements Requested By the Users and by

Project Management. May Change the Baseline Cost of the project as

well as the Planned Completion Date.

Requires Stakeholders Approval

Changes that do not affect the project Scope Usually Changed due to the project team requests

Changed in Design, Architecture, Delays, Etc.

Stakeholders will be notified if the changes aresignificant enough.

26103858 Cost Management

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